Article Review

New Regionalism:
How Globalism Reorders the Three Worlds of Development

by
Clark W. Reynolds

FUTURECASTS online magazine
www.futurecasts.com
Vol. 9, No. 6, 6/1/07

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The "New Regionalism:

 

 

 

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  A new focus for development economics is provided by Clark W. Reynolds in the first article of the first issue of the Journal of the Flagstaff Institute.

  The Flagstaff Institute is an organization dedicated to promoting international commerce and explaining its benefits. FUTURECASTS has from its earliest issues included explanations of the benefits of globalization among its primary themes and has repeatedly explained the importance of its further promotion.

Inevitably, problems with popular dissatisfaction, strife, disease, and a variety of other human disasters overflow the boundaries of these unfortunate areas and create broader - perhaps worldwide - problems.

  Broad acceptance of the need for open national markets and the maintenance of financial equilibrium has loosed the forces of globalization with massive benefits for all participating nations. But this is clearly not enough, Reynolds cogently argues.
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  Numerous nations as well as localities and regions within nations and regions across national boundaries are being left behind. Some fail to participate in international commerce at all or do so only minimally by means of commodities exports. Inevitably, problems with popular dissatisfaction, strife, disease, and a variety of other human disasters overflow the boundaries of these unfortunate areas and create broader - perhaps worldwide - problems. They may even threaten the progress of those participating in international commerce.
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  In "New Regionalism: How Globalization Reorders the Three Worlds of Development," Reynolds provides an intellectual methodology for focusing beyond national macroeconomic policy so that the particular policy needs of localities and regions can be analyzed and addressed. The article highlights the importance of local and regional institutions and political, financial and civic leaders. It encourages their inclusions in policy making. It emphasizes the interdisciplinary factors involved in development economics analysis and policy making at the local and regional level.

  "Regions are endowed with different cultures, historical backgrounds, climates, proximity to national and world markets, and endowments of natural resources. Increased international exchange and the regional integration of national economies may well cause clashes among cultures, races, gender groups, workers and management, regional versus national authorities, and those who espouse different economic systems.

The "Three Worlds" of globalization:

  The three worlds of Cold War analytical discourse have thankfully become irrelevant with the end of that conflict.
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The current world order has divided itself in general terms into three segments based on "a new pattern of international and interregional economic stratification" similarly useful for current analytical discourse.

  There is a clear new pattern now, Reynolds points out. This current world order has also divided itself in general terms into three segments based on "a new pattern of international and interregional economic stratification" similarly useful for current analytical discourse. These three segments "show patterns of convergence and divergence among nation states and their subregions."
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  The Cold War "First World" remains - defined now by its advanced economic and political development. However, the nonaligned Cold War "Third World" has divided into those nations that to some substantial extent have aligned themselves with globalization and the processes of economic development and those that in general terms do not participate in any meaningful way in international commerce and thus fail to develop economically or politically. The Cold War Soviet bloc "Second World" has disappeared - its constituent parts similarly spinning off into these two economic development spheres - some even migrating into the European Union and eventual "First World" status.
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  For purposes of analysis, Reynolds regroups these nations from the Cold War second and third worlds into a postwar grouping of "Second World" developing nations and "Third World" nations with little or no participation in international commerce and thus little or no economic development. (These Third World nations remain chronically undeveloped despite decades of massive aid flows and hectoring advice from international institutions.)
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  He then goes several steps further to group localities and regions into these categories to facilitate consideration of Third World regions and localities that may exist even within and across the borders of First World and Second World nations. Similarly, there are localities within economically Third World nations that rate Second World or even First World status. Reynolds mentions many examples - most noteworthy the differences among regions and localities within China, India and Mexico.
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    The "New Regionalism" is offered by Reynolds in the hope that identification of Third World regions and localities within Second World and even First World nations will help focus analysis and direct policy responses appropriate to their needs. It is his hope that First World assistance and creativity will find ways of encouraging the development of the "enterprise, civil society and good governance" needed by Third World nations in place of the coercive and populist governance they currently suffer from.
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  The good news is that the economic First World continues to widen. "High income/high productivity" regions now include even "enclaves of prosperity" in emerging nations, as well as in areas of Russia, eastern Europe, eastern China, major parts of Japan, and in Hong Kong and Singapore.
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  More good news is found in the increasing ranks of the economic Second World. These "emerging market regions" include large parts of eastern China, some key provinces in India, sections of Mexico's northern states and a few other of its subregions, and areas of Brazil, and Argentina, among others.
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  But there is still a disappointing Third World - still falling behind - still failing to participate in international commerce - and still continuing to lack the political, economic and societal essentials for the development of prosperous market systems. Typically, in these states, the politically influential flourish, rent-seeking activities are widespread, and the people's commerce is of little or no concern to government.

  "[Political] elites and private wealth-holders who capture a large share of the growth dividend often operate out of short-term self-interest rather than long-term stability and sustainability. They fail to address the needs of those in the developing regions of their own countries -- part of today's 'New Third World' -- just as the beneficiaries of globalization in the First World tend to ignore those who lag behind at home as well as abroad."

  The importance of competent, "far-sighted" leadership is stressed by Reynolds. Governments must not only facilitate commerce at the national level, they must analyze and overcome particular barriers to participation and the financial obstacles within their subregions. They must cushion the adverse impacts of change to defuse opposition. Reynolds mentions as an example the allocation of funds from rapidly developing eastern regions in China for construction of railroad links in the western provinces.

  "The old school of development economics no longer commands center stage, having made its major contributions during the period of post-World War II reconstruction and the Cold War. The new approach must factor in regional differences in comparative advantage based on different endowments of natural and human resources, social access, technological know-how and the limitations that arise when a labor-abundant region subject to a dominant currency can't devalue to match its lower productivity."

  Reynolds mentions some of the myriad policy areas that may need attention by particular nations and regions. These include agricultural protectionism, aging populations, declining industries, minority groups and migrant workers, macroeconomic constraints and policies, education and physical infrastructure, tax policy, access to national and global markets, access to financial capital, institutional and cultural change, safety net provisions to cushion the problems inevitable with rapid change, and much more.
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  Globalization is a complex, many faceted economic structure. Productivity governs demand - today's production provides value for yesterday's savings - both productivity and production increasingly rely on an interdependent global market system. And as always, human capital is the vital ingredient that provides the "entrepreneurship, creativity, leadership, and hard work" that makes the system function.

  "Cultures matter as well, and history, and the psychology of expectations. So entrepreneurship must be cultural as well as economic, and politics must reflect a broader spectrum of interest, even though this may slow the process of exchange. Solutions in a second-best world must be second-best."

Each locality and region has its own peculiar mix of advantages and disadvantages that must be addressed with suitable mixes of policies.

  The unequal nature of the global economic advance is emphasized by the author. Each locality and region has its own peculiar mix of advantages and disadvantages that must be addressed with suitable mixes of policies. Indeed, that is the reason that he developed the "New Regionalism" analytical framework.

  "Each region has its own character, resources, and conditions of supply and demand that determine its economic potential. But the long-term competitiveness of a region may differ sharply from its short-term conditions. A region's long-term potential can be transformed into short-term competitiveness -- long term comparative advantage becomes short-term competitive advantage -- by the right mix of technology, entrepreneurship, risk-taking finance, and public policy to provide the necessary economic and social infrastructure."

  Revenue sharing is an important policy tool, but can easily be overdone.

  "Russia and Argentina provide examples of the noxious impacts when all or most revenues for regional governance come from the central government. Separation of local and regional spending authority from the responsibility for revenue generation can destroy the incentive for conscientious efforts by local and regional officials to facilitate local and regional commerce."

  Risk-taking should properly be left in private hands. Government should not pick winners and losers. However, government and non-government organizations at local and regional level have vital roles in coordinating business, labor and community interests, facilitating the people's commerce, and attending to the financial, fiscal and infrastructure needs of backwards regions.

"For those economies that wish to enter the global race to prosperity it is necessary to open up access in terms of laws and institutions that provide the basis for those enterprises that prove able to take advantage of the expanding world market."

  "This is where an inclusive approach to development economics meets the new regionalism. It requires cooperation and far-sighted planning to provide education, infrastructure, access to technology, credit, and information about future opportunities at home and abroad -- including other regions in the same nation state."

  Migration policy is an obvious area where national policy must be tailored to suit regional and local conditions. Reynolds points out, for example, that NAFTA fails to consider local and regional factors, but this omission is mitigated somewhat by cross-border cooperation among civil authorities, employers and labor organizations.

  "Much depends on access to the market and on institutions that ensure a level playing field for those in a world that looks flat but is really uneven. Access is everything. For those economies that wish to enter the global race to prosperity it is necessary to open up access in terms of laws and institutions that provide the basis for those enterprises that prove able to take advantage of the expanding world market.

  Small businesses and large businesses play a role, as well as foreign investment and mergers to help access markets. Innovation, branding, and the ability to access expanding global demand are among the ways that firms enjoy sufficient receipts to earn increasing profits, pay higher wages, improve the quality of products, innovate, and provide safeguards for the environment - "and avoid the pitfalls of 'commodity hell' -- in which all goods and services are reduced to generic commodities, and the entrepreneur is relegated to a bureaucrat."

  "In this paper I call for legal and institutional change to spread the benefits of growth more broadly and to open access to all. But  there is immense skepticism about political regimes that are slow to act for interests other than their own, about cultures that reinforce stagnation and repression, and appeals to traditional values that foster reaction."

  Fortunately, prosperity has enabled the beneficiaries of First World prosperity to entertain philanthropic tendencies and concerns for the less fortunate. But that concern must be guided by analysis with a regional and even a local focus if it is to generate effective assistance policies.
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Convergence and divergence:

  Each economic World has particular needs in particular economic circumstances.
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"Greater openness increases the importance of regionalism as an adjunct to macroeconomic policy."

Policies appropriate for the distinct needs of particular regions "are impossible without good governance and a functional federalism that facilitates the commercial activities and well-being of the entire population."

  Downward convergence of First World wages and incomes is a risk of modern globalization as First World capital and technological advantages are rapidly reduced by the flow of capital to Second World and Third World nations. High wages and incomes can only be sustained by high value-added production. This requires investment in education and new technologies.
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  However, policies that help lagging Third World regions will reduce labor immigration flows and support rising incomes in developing Second World regions. Similarly, wage and income advances in Second World nations and regions support higher wages and incomes in both the Third World and First World nations.

  "We have seen that globalization changes the conditions for development policy. Greater openness increases the importance of regionalism as an adjunct to macroeconomic policy. Fiscal balance and stabilization measures required for globalization have both good and bad effects on labor markets. Structure matters for stability and growth, because of evolving comparative advantage and the need for broader distribution of the gains from growth. Trade and finance benefit from policies that widen the domestic market and permit more balanced growth of international exchange."

  We can see these factors in play most vividly today in China, Mexico and India. However, policies appropriate for the distinct needs of particular regions "are impossible without good governance and a functional federalism that facilitates the commercial activities and well-being of the entire population."
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  Reynolds analyses four general types of convergence.

  • Upward convergence - where the growth of productivity per worker is faster for lower income regions. This is typical for the "four tiger" economies of southeast Asia as well as for Ireland, eastern China, northern Mexico, and various parts of Chile, India, Brazil, and Spain, among others.
  • Downward convergence - where the downward phase of the business cycle impacts First World economies more than Second World or Third World economies.
  • Upward and downward divergence - as is occurring at present as some misgoverned Third World nations that fail to participate in globalization actually decline while the rest of the world forges ahead. This can also happen during the downward phase of the business cycle when Second World and even Third World nations fall faster than First World economic systems.
  • Normal convergence - where competition from lower wage regions brings down First World incomes while Second World incomes rise.

  As a matter of economic history, this has not been the "normal" experience. Although Second World competition does inevitably undermine some First World industries and their associated labor force incomes, average incomes in First World nations continue to advance during periods of globalization. Reality has for a century and a half perversely failed to conform to the left wing expectation of the imminent disappearance of the middle class.

  Upwards divergence seems to be the rule today as capital and political influence benefit disproportionately more from globalization, skilled labor compensation rates draw further ahead of unskilled labor pay rates, and development draws Second World nations and regions further ahead of the undeveloped Third World. Income inequality within China "is beginning to match the distributional gaps" in nations like Mexico and Brazil. Mercantilist practices in many nations direct the benefits of globalization disproportionately to the politically influential, in some cases sufficiently to prevent any benefits from accruing to ordinary labor.
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  China's first world market is estimated by Reynolds at about 50 million, its Second World market at about 200 million. These are already huge new markets, although they leave still over 1 billion in Third World poverty in China. Development is slowly dispersing inland as land and labor costs rise in the east, but the system as a whole remains precariously unbalanced. It is supported by its massive trade surplus with the U.S. and the European Union, but this, too, is precariously unbalanced. Adjustments are inevitable, but everything depends on whether those adjustments will be smooth or the result of periodic crises.
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An inclusive development strategy:

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  In an interdependent, globalized world, development policy must consider state and local governments and regional associations.

  "It should focus on measures that address the particular conditions -- comparative advantage -- of specific localities. Attention to local needs such as education, technical assistance, financial services, transportation, communications, and lower-cost access to main markets will help spread productivity and income throughout the economy through a virtuous cycle of rising wages and increased profitability of investment -- in both physical and human capital."

Remittances are of course a big asset to Third World regions, but without a proper economic environment that facilitates local commerce, savings will simply flow "upstream" to safer and more profitable investments in Second World and First World regions.

"Policies that facilitate the commerce of the people are essential at all levels of government."

  Development policy should be devised to be increasingly inclusive.

  "This calls for state and local policies tied to a national effort to broaden the geographic base of development. This approach to regional integration in a widening global market is central to the policies of what is hoped to become a new regional economics."

    Reynolds stresses labor market interdependence. Absent attention to the particular needs of lagging regions, capital as well as labor will flow away, leaving lagging regions chronically impoverished and overburdening productive regions with migration flows of a magnitude that may depress Second World and First World wage levels.
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  Remittances are of course a big asset to Third World regions, but without a proper economic environment that facilitates local commerce, savings will simply flow "upstream" to safer and more profitable investments in Second World and First World regions.
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  Reynolds concludes:

  "The new regionalism is complementary to macroeconomic  policy -- it builds upon solid foundations. It does not pretend to do the job of predicting the utility of specific investments. Rather, it works as a catalyst between investors, workers, households and government at local and regional levels to provide the financial, human, legal, and physical infrastructure needed for a broad-based development strategy that focuses not only on global competition and elite enclaves but on the entire domestic market."

  Indeed, markets are not enough. "Policies that facilitate the commerce of the people are essential at all levels of government."

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  Copyright 2007 Dan Blatt